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North Carolina Supreme Court Upholds Enforceability of Waiver of ECOA Claim
September 18, 2014
Last month, the North Carolina Supreme Court issued an important opinion for lenders in this state. The opinion reversed the North Carolina Court of Appeals’ decision in RL REGI N.C., LLC v. Lighthouse Cove, LLC, which found that a waiver of claims contained in a forbearance agreement could not waive a guarantor’s affirmative defense that a guaranty was obtained in violation of the Equal Credit Opportunity Act (ECOA).
The Lighthouse Cove case involves a familiar story for many lenders. In that case, Regions Bank provided a multimillion dollar loan to the borrower for the acquisition and development of a 50+ acre tract of land. Among other things, the loan was secured by the personal guaranties of the borrower’s members and their spouses. By 2009, like many acquisition and development loans at that time, the borrower was in default of its loan obligations and, as a result, the parties entered into a forbearance agreement with the bank. Under the terms of the forbearance agreement, the Bank agreed to forbear exercising its rights under the loan documents for a period of time in exchange for certain promises and agreements from the borrower and guarantors. In the forbearance agreement, the borrower and guarantors acknowledged their obligations under the loan documents and waived and released the lender from “any and all claims, defenses, and causes of action” that occurred prior to the date of the forbearance agreement. The borrower and guarantors subsequently defaulted on the loan and forbearance agreement. By that point, the loan had been purchased by RL REGI North Carolina, LLC, which filed a lawsuit against the borrowers and guarantors seeking the deficiency owed under the loan documents.
In response to the lawsuit, one of the spouse-guarantors asserted, as an affirmative defense, that Regions Bank had unlawfully obtained her guaranty in violation of the ECOA. Specifically, she alleged that the bank wrongfully required her guaranty of the loan despite the borrower and/or her husband being independently creditworthy. The trial court found that the guaranty violated the ECOA and denied recovery despite the waiver provisions contained in the forbearance agreement. The North Carolina Court of Appeals affirmed the trial court’s decision. According to the Court of Appeals, a waiver of claims provision in a forbearance agreement, no matter how broad, could not waive the defense that a guaranty was obtained in violation of the ECOA.
Fast forward one year later, the North Carolina Supreme Court has reversed the decision, finding that the Court of Appeals had improperly allowed the spouse-guarantor to assert a defense she previously waived under the forbearance agreement. Specifically, the Supreme Court found that, “[i]n executing the forbearance agreement, [the spouse-guarantor] acknowledged the enforceability of her guaranty and waived her potential claims, including those under ECOA, in exchange for leniency in repaying the debt.” As a result, the Court of Appeals had deprived the lender of its rights under the forbearance agreement. It is important to note that the waiver of claims provision contained in this particular forbearance agreement did not specifically waive the ECOA defense or statutory claims; however, the Supreme Court found that it contained “comprehensive language” that, among others, waived and released any claims that could challenge the lender’s “good faith” or “commercially reasonable” conduct. This broad language, according to the North Carolina Supreme Court, included statutory claims and precluded the spouse-guarantor from raising her affirmative defense of an ECOA violation.
In light of this decision, it is important for lenders and lenders’ counsel to reexamine their forbearance, modification and renewal agreements to ensure the documents include broad and sufficient waiver language. This is especially important given the growing number of affirmative defenses raised on the basis of an ECOA violation. Lenders should view forbearance, modification and renewal agreements as an opportunity to secure additional protections and reduce liabilities in credit transactions in the event of litigation at a later date. 
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